Last week the business world cheered as Apple became the first American company to be valued by the market at US$2 trillion (the first global company worth US$2 trillion was actually oil giant Saudi Aramco, but that is generally forgotten).
The celebrations when companies hit valuation targets is one of the many mystifying parts of market capitalism (or whatever you call the West’s cronyist system of government).
We don’t celebrate the price of milk hitting $2 a litre or petrol hitting $1.50, but for some reason we celebrate at the prospect of wild asset price inflation. Yet well-known investors like Gene Munster claimed Apple breaking through $2 trillion was “a poll position in investors’ minds. When you cross the milestone first, it’s a signal of leadership.”
The reasons for Apple’s share price inflation make the adulation even more perplexing. The US market hit a COVID-19 inspired bottom on March 23 when the S&P 500 dropped to 2237 — extraordinary liquidity efforts by the US Federal Reserve (read: money printing) coupled with huge fiscal stimulus led a huge rebound to 3397 now, a near 50% increase.
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But it was no equal opportunity rally. Almost all the rise can be attributed to the “FANG+” shares — the group of tech companies led by Apple, Amazon, Facebook, Google and Netflix (as well as Ali Baba, Baidu, Nvidia, Tesla and Twitter). The FANG+ index is up by more than 50% and explains almost all the increase in the general market.
Marketing professor Scott Galloway produced this graph back in June which tells the story (hint: it’s got worse since):
Let’s go back to Apple. There are two ways a company’s market value increases: either it lifts earnings, or investors value each dollar of earnings more than before (this is known as “multiple expansion”). Over the past decade, Apple has had an average price-earnings (PE) multiple of about 15.
Last year Apple’s share price spent most of the time around the US$175 mark, which meant the market thought Apple was worth about US$750 billion. Apple’s share price in recent months has jumped to $499, giving it a market cap value of US$2.1 trillion. That rise was largely driven by investors bidding up the price of shares, rather than the company actually making more money.
As a result, Apple’s PE multiple is now 37. Apple has been bid up by investors for two reasons. First, the big tech companies have soaked up most of the excess liquidity that has been pumped into the market. As we noted, take out the big tech companies and the market has barely rebounded at all.
But Apple has not only benefited from the Robin Hood-led speculator driven bubble in tech. A second phenomenon has also happened: the market no longer considers Apple a hardware business which makes phones and iPads, but rather a business that gets more and more revenue from recurring sources, like the App Store and Apple Music. (Companies might get a one- or maybe two-times multiple on revenue for hardware sales, compared with 10 times for recurring software sales.)
While business journalists and speculators fawned over Apple and its chief executive Tim Cook (who has somehow been able to generate a scandalous US$1 billion fortune personally), the company was entering a legal fist fight with Tencent-backed Epic Games, the maker of the popular Fortnite series.
In short, Epic allowed users to buy in-game items directly from it (for a lower fee than via Apple), and was promptly removed from the AppStore. Epic, anticipating this, then sued Apple claiming that it’s operating an illegal monopoly.
In its lawsuit, Epic alleged: “Apple has become what it once railed against: the behemoth seeking to control markets, block competition, and stifle innovation. Apple is bigger, more powerful, more entrenched, and more pernicious than the monopolists of yesteryear.”
Like a railroad baron in the 1850s, Apple owns the rails and charges an arbitrary 30% of revenue to users of the app store. This is the very definition of monopoly rent. (As a contrast, banks and credit card infrastructure providers charge between 1% and 3%.)
Apple makes great products and has largely avoided the privacy issues pervading Google and Facebook, but it has become a rampant monopolist which has squeezed developers, damaged competitors (see Spotify) and increased prices for consumers.
This is no cause for celebration.